In an earlier post, I blogged about the Baltic Dry Index as a good indicator of economic activity (Read it here: Ready for a recession?)

Even if we were to magically start moving in the Baltic Dry Index in a positive direction which would be a tremendous relief for everyone (but remember – *magically*), the US treasury and the Federal Reserve would continue to devalue the US dollar for two practical reasons:

1) Repay outstanding debts with a depreciated currency. This is really quid pro quo with some of the trading partners of the US against whom the US has been running trade deficits for the better part of a decade. The whole point of trade is not for one side of the equation to accumulate a lot of paper currency but to reciprocate in buying the origin country’s exports.

2) Make US exports competitive with other countries and reignite production/manufacturing stateside.

In fact, if the US (and World) economy were to recover some what, the above two agencies would devalue the US dollar with a vengeance.

This sort of policy, if successful, would mean a repatriation of some of the manufacturing that went overseas. Going further, when US firms look at the scenario (albeit a few years down the line) and see that the assets created overseas for manufacturing whatever widgets were outsourced have depreciated or is in need of upgrades to remain viable, that would be the decision point for deciding where the next generation of manufacturing will be located.

Much of the trajectory of what we see taking place goes to answering that question of the future and the above two agencies are hell bent on creating conditions that answer this question of manufacturing in the positive.

Or so I believe.

In such a scenario, what I believe to be key to long term competitive manufacturing is the ability to be smart about manufacturing – it means being able to operate using a very thin buffer for error because American firms will be competing with overseas firms (firm benefiting from their own countries’ competitive devaluation) that will continue to compete on large volumes and scale.

That’s probably a rather safe thing to say as long as everyone is saying it. I would add that they might be whispering, “Well, what do you think would happen given the costs of in-sourcing?”. That’s probably not a safe thing to say, if you were a CEO.

Chief executive officers and senior manufacturing executives working for multinational corporations predict the United States will become an even less competitive location for manufacturing, according to a survey conducted by Deloitte on behalf of the U.S. Council on Competitiveness. Over the next five years, the United States is expected to slip further behind the world’s current leading manufacturing nations — China, India and Korea. The CEOs say Brazil will surpass the United States as a better destination for manufacturing by 2015.

The CEOs "see a fundamental shift — a new world order in manufacturing — that replaces the 20th century dominance" of the United States, Germany and Japan, says Craig Giffi, vice chairman of Deloitte. "It’s a virtual restart from the 21st century."

The CEOs are nervous about what this means for their children and grandchildren if the United States can’t get back into the global manufacturing game. They recognize that outsourcing of manufacturing has not worked in the way they had envisioned. "We overestimated the issues associated with outsourcing jobs to low-cost nations and the consequences of that," says Giffi. "The executives underestimated the erosion that would have in their overall capabilities in places like the United States and how that would fundamentally shift their supply chains."

and

But the United States government can’t dither in putting together policies that favor production over consumption. "This isn’t something that can be debated indefinitely," says Giffi. "Business leaders are forced into a world of making decisions 24 hours a day seven days a week on where they have to make investments in plants, equipment and new jobs." If the United States does not address its cost structure, talent gaps, trade polices and infrastructure "then we will see a continual gradual deterioration and downward spiral. . ."

Now, in the pages of this blog, I’ve gone over back and forth over the outsourcing, off-shoring and in-sourcing arguments countless times. Whether the decision to outsource or offshore manufacturing is based on flawed cost modeling, the growth of a global culture of some weird shape or form, easy credit or some other combination of other factors – what is obviously true is that it has been happening for more than a decade now.

One of more pathetic slogans that I have heard during this recession/depression is – “Buy American.” Well, I’ve been hearing this slogan even before that too. The implication of such a statement is staggering.

Allow me to explain. If the only recourse the American manufacturer has left in his arsenal to the onslaught of “cheap” foreign manufactured items is patriotism i.e. “Buy American”, it’s time to remove the last tatters of a once delicate fig leaf that has been long defending the promise of American manufacturing. If using that same flawed cost modeling, it costs ten times more to manufacturing something here in the USA than in some place far far away – there are two glaring questions – Why? and Where is the equilibration point?

The first question is :Why?

Well. that’s quite easily answered if one is prepared to be crude. Life doesn’t cost as much over there. Being paid 50 cents an hour to stitch shoe soles might inflame the passions of the very flammable over here but 50 cents an hour is a life changing event in some parts of the world. In other words, the difference in costs (using the same flawed cost modeling) is purely because of divergent cultural attitudes, wants and desires – after all, needs are the same for the human being. And this divergence has been effected in the course of less than a century. The corollary of this statement is that rights, benefits and freedoms come at an enormous price and you have to be willing to pay it.

The second question is : Where is the equilibration point?

Now, we all know that there is never going to be perfect equilibrium between the manufacturing options from overseas and those over here i.e. because of backgrounds, resource distribution etc, there are going to be quite a different set of initial conditions for any operation/endeavor. So, the natural question is whether the equilibration point is at three, five or seven times wage differential or does it lie on some other dimension itself? Is it going to be dictated on a dimension of response time or quality or some other critical cost impacting dimension? In the real world, it is a function that intersects all of these and as we muddle from one crisis to another, it will become quite apparent.

But the proof of equilibration is in the pudding. Consider for a moment, that all tax breaks for US corporations that move jobs overseas are eliminated, the currency exchange rate differential between the US$ and other foreign currencies are eliminated and so on and so forth – will there still be a significant wage differential remaining? Will the American manufacturer still have to utter the words, “Buy American!!” as a rejoinder to those who weigh the output stateside and overseas and votes with their dollars to buy overseas? For American manufacturing to win, there has to be an exceptional value delivered even to American buyers be they consumers or intermediates. Only exceptional value can force equilibration at a higher wage differential – so the real message to the American manufacturer seems to be – where is the value that I ought to be getting for this high a wage differential? And I’m afraid that the answer just doesn’t cut it.

You see, I fear that it is not the multinational CEO that has been shipping jobs overseas as much as it is the lack of value that was being created that forced the issue. It may not be that one fine day, a couple of CEOs figured out that it is better to ship everything, lock, stock and barrel to some god forsaken place far far away. Instead, a few CEOs looked at what they were getting for what they were paying and decided not to pay that differential any more.

I fear that in a very general sense, the American brand as far as manufacturing was concerned (and maybe in some other aspects as well) has lost its way and that’s why it becomes necessary to invoke the fig leaf of patriotism.

The words of General Patton concerning patriotism ring true –

Don’t be a fool and die for your country. Let the other sonofabitch die for his.

That’s the be all and end all of patriotism. For everything else, bring Value.

About me

I am Chris Jacob Abraham and I live, work and blog from Newburgh, New York. I work for IBM as a Senior consultant in the Fab PowerOps group that works around the issue of detailed Fab (semiconductor fab) level scheduling on a continual basis. My erstwhile company ILOG was recently acquired by IBM and I've joined the Industry Solutions Group there.